Operational risk assessment of public financial management in Nepal: a review of challenges and opportunities

This report aims to inform an ongoing dialogue about the implementation of public financial management (PFM) improvements in Nepal, including their prioritisation and sequencing in the prevailing political context. It provides a “reality check” on the strengths and weaknesses of the existing PFM system and focuses on nontechnical aspects such as institutional and political factors. The study was conducted as a joint initiative between the government and its development partners.

In pursuing PFM reforms, the government on Nepal can rely on a number of existing strengths, of which three stand out in particular. First, the experience of the peace process suggests that actors across the political spectrum can come together and sacrifice some of their own preferences in order to achieve a joint political outcome. Second, civil service professionalism and cadre cohesion are valuable elements of existing state capability. Nepal’s civil service is highly professional but, along with other public institutions, seems to be under threat from political instability and interference. Third, some important building blocks of inter-entity coordination for PFM reforms already exist.

The concern about the state of public finances is best summarised as, “public spending is compromised". This is a concern over both the quality of every unit spent and the failure to achieve quality outcomes and results through the PFM system because of shortfalls in budget execution. According to the data, Nepal has performed quite well at the aggregate level in terms of deficit and debt levels over the past few years. However, more detailed analysis of public finances within sectors, at subnational local levels, and inside spending units reveals more serious concerns.

In order to address these concerns, the report takes a “problem-centric” approach, focusing on issues that the government sees as priorities and that can be solved in a realistic timeframe. Based on expert opinion and comparative analysis, it breaks down the challenges into four areas: (1) oversight and scrutiny, (2) the budget process, (3) implementation of capital spending, and (4) central finance institutions. The report identifies next steps for each of these areas, divided into quick wins, reforms needing sustained engagement, and long-term reforms.